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B-Corporations: Profits AND Social Responsibility?

The individual best serves society by pursuing his or her own self-interest to the best of his or her own ability.

A corollary to that principle of modern capitalism is that a corporation best serves society by maximizing profits and generating good returns for investors.

But there’s a growing movement that rational, calculated self-interest is no longer its guiding force.

We have indeed devolved from acolytes of Adam Smith into minions of Gordon Gekko.

“Greed,” in this day and age, “is good.”

This corruption of self-interest is what led to the global financial crisis, the origin of which was a singular focus on profit maximization via structured products, based on dodgy “NINJA” mortgages.

It’s what drives a pharmaceutical CEO to raise the price of a potentially lifesaving device by more than 400% in nine years as she receives a 671% pay raise.

That CEO is the daughter of a sitting Democratic senator. Mylan N.V.(MYL) CEO Heather Bresch (nee Manchin, as in “Sen. Joe Manchin of West Virginia”) is about to become the next Martin Shkreli. That congressional hearing should be a hoot.

Greed, coupled with our tendency to be overly optimistic about our own behaviors and overconfident about our predictions, creates side effects.

And if the policymakers creating rules and the corporations doing business aren’t made to be responsible for these side effects – or “externalities,” in the parlance of modern economics – the system begins to break down.

It boils down to the fact that we – me, you, our elected officials, the regulators they hire, the people who run the major corporations that buy and sell both of the latter – aren’t rational, utility-maximizing actors.

And in a system that aggregates the decisions of inherently irrational actors, externalities pile up.

Externalities (the traditional example is pollution created by manufacturing processes) cost society a lot.

Corporate social responsibility (CSR) represents a loosely defined set of principles, or a theory, designed to limit externalities.

CSR, a form of self-regulation that aims to align a going concern’s activities with the spirit of the law, ethical standards and national and/or international norms, is not a new concept.

But the idea of institutionalizing it is relatively fresh.

That brings us to the “B Corp movement” – a social innovation that actually goes a step further and advocates the idea of “people using business as a force for good.”

That last quote is actually trademarked by B Lab, a nonprofit organization comprising 1,854 B Corporations engaged in 130 industries across 50 countries.

According to Patagonia CEO Rose Marcario, the B Corp movement is “built on the simple fact that business impacts and serves more than just shareholders – it has an equal responsibility to the community and the planet.”

B Lab is the third-party evaluator and grantor of certified B Corporation status, which requires companies to meet social sustainability and environmental performance standards, accountability standards, and be transparent to the public.

As Ryan Honeyman writes in The B Corp Handbook, “B Corp certification is similar to LEED certification for green buildings, Fair Trade certification for coffee or USDA Organic certification for milk.

“A key difference, however, is that B Corp certification evaluates an entire company (including worker engagement, community involvement, environmental footprint and governance structure), rather than looking at just one aspect of a company (a particular building or product).”

For-profit companies are eligible for certification.

The B Corp movement is certainly a creative approach to bringing corporations to the service of goods greater than themselves.

Equally refreshing is what it’s not: an instrument of the state. Rather, it’s a force of the market.

But so far, not even a handful of publicly traded companies have opted in.

And whether an investment can generate a good return and also make valuable contributions to society remains an open question, at least so far as the stock market performance of B Corps is concerned.

The share price of Australian Securities Exchange-listed Silver Chef Ltd, which provides funding for restaurant and kitchen equipment, is up 26.8% over the last 12 months, even after a one-day 17% decline on July 21. Silver Chef has been in business for more than three decades and listed on the ASX in 2005. Its innovative “Rent-Try-Buy” financing mechanism helps businesses – including start-up cafes as well as large restaurants and hotels – save cash, free up working capital, and adjust to varying market conditions and consumer trends.

Natura Cosmeticos SA, which manufactures and distributes organic cosmetics, fragrances, and personal hygiene products, was certified as a B Corp in December 2014. It was founded in 1969 and went public on the BM&F Bovespa in 2004. Since then, it’s generated a total return of more than 280%, versus 216% for Brazil’s main equity benchmark. And over the last 12 months, Natura is up 44%, versus 19% for the broader index.

Other stories are not so “in the green.”

Shares of Etsy Inc. (ETSY), the peer-to-peer e-commerce website focused on handmade or vintage items and unique factory-manufactured items, are down more than 50% since debuting on the Nasdaq on April 24, 2015.

Meanwhile, bigger companies are showing signs of support for the B Corp movement.

Unilever Plc (UL), which recently acquired Dollar Shave Club for $1 billion, has made some noise about joining the ranks of the socially responsible.

If it eventually does apply for and receive B Corp designation, it’ll be the biggest publicly traded B Corp on the planet by far, with a market capitalization of about $140 billion.

On October 2, 2015, Laureate Education Inc. — “the largest global network of degree-granting higher education institutions,” according to the company’s website, with more than 87 schools in 28 countries — filed with the Securities and Exchange Commission to go public.

That makes it the largest certified B Corp to file for an initial public offering.

Adam Smith’s most famous and influential conclusion is that economic decisions are better made by individuals rather than dictated by one person or a centralized authority.

At the same time, Smith, a moral philosopher as well as an economic theorist, certainly contemplated the proper role of merchants and manufacturers in society.

We need not rely on the government, according to Smith, when widespread market forces would more efficiently allocate resources.

There’s nothing at all wrong with Smith’s theory. The problem is our understanding and implementation of it – the corrupt, dogmatic pursuit of a few of his ideas.

Thanks to researchers like Daniel Kahneman, we know a lot more about human behavior and decision-making in an economic context than we did in 1759, when Adam Smith published The Theory of Moral Sentiments, and in 1776, when his An Inquiry into the Nature and Causes of the Wealth of Nations came out.

Although indications by Unilever and Laureate suggest the B Corp movement has some staying power, it remains to be seen whether the way we do business will indeed change for the good.

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